When you are trying to decide where to invest your money, it’s important to consider a stock’s current valuation. Otherwise, you could be limiting your possible returns, and face the risk that the price could substantially drop if it’s trading at too high a premium. On Robinhood, a zero-commission trading platform that’s popular with many young investors, there are several hot stocks on its Top 100 list today that are grossly overpriced.
Three companies that are good investments (but not at their current valuations) are HEXO (NYSE:HEXO), PayPal (NASDAQ:PYPL), and Tesla (NASDAQ:TSLA). While there may be a good reason to invest in their businesses, their share prices today are just too high. Both Tesla and HEXO have doubled in just the past three months. And that’s why you should consider holding off on buying them — at least until things settle down and their valuations come down to more reasonable levels, perhaps after the next market crash.
Image source: Getty Images.
1. HEXO
HEXO’s shares have taken off in 2021. The pot stock is already up more than 70% and soundly outperforming the S&P 500, which is practically flat over the same few weeks. The company announced earlier this month that Truss, its joint venture with Molson Coors, would be launching hemp-derived cannabidiol (CBD) beverages under the brand Veryvell in Colorado. Fresh off the heels of the U.S. election in November and news that four more states would be legalizing recreational marijuana, it’s easy to see why investors may have gotten overly bullish on HEXO.
But it hasn’t all been good news for the company. This month, the Ontario Cannabis Store announced that it was issuing a voluntary recall on three of HEXO’s disposable vape pens.
And there are still questions about how much the company will grow. The company last released its quarterly earnings on Dec. 14, 2020, and sales of 29.4 million Canadian dollars for the period ending Oct. 31, 2020, were only up 8.7% from the previous period. Beverage sales of CA$3.1 million grew 53.7% quarter over quarter, but they were still just a fraction (10.4%) of the company’s top line. While investors are optimistic about beverage sales, it may not be enough to justify HEXO’s current price tag. When comparing its price-to-sales (P/S) multiple to that of its Canadian peers, HEXO comes out higher than Aurora Cannabis, Aphria, and OrganiGram:
HEXO PS Ratio data by YCharts
Without a sizable correction in share price, Robinhood investors should steer clear of HEXO for now. The stock’s rapid ascent in recent months has made it too expensive of a buy, especially given its lackluster sales numbers.
2. PayPal
In the past year, shares of PayPal have nearly doubled while the S&P 500 is up by just 13%. Currently, investors are paying a price-to-earnings (P/E) multiple of more than 80 to buy shares of…
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